Time to rethink recessions and economic growth – less could be more

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John Rapley is a political economist at the University of Cambridge and managing director of Seaford Macro.

Most projections of the likely impact of climate change foresee a world that’s unlivable for some and unpleasant – even quite unpleasant – for most. If you have children, or hope to one day have children, is such an uncertain future one you wish to bequeath them? So spare a thought for those climate activists splashing paint on a van Gogh. We need to cap global carbon emissions, and we need to do it now.

So far, nothing we’ve done has really worked. There’s only one remedy which has been shown to always do that: recession. That’s why some call for degrowth – shrinking the size of economies.

Economists say you might as well try to stop gravity. Nobody wins an election promising to send the economy backward. Instead, they say, trust technology to save us.

But unfortunately, that won’t do it.

Not because scientists have failed to harness technology – on the contrary, they’re doing amazingly. The pace of progress in energy-efficient technology is mind-boggling. In the past 30 years, the cost of producing the batteries in electrical vehicles has fallen by 98 per cent. Back then, only millionaires could imagine driving EVs. Today, schoolteachers can.

Yet for all that progress, we just keep producing more greenhouse gases. Partly that’s down to a basic flaw of reasoning. Techno-optimism assumes we’ll bank efficiency gains. In fact, we spend them. Look at our houses. Our insulation and heating systems have advanced to the point that we use far less energy to heat our homes than we did just a few years ago. So what have we done? Built bigger homes. The same goes for the appliances in them. Our fridges may be hyperefficient, but they’ve also grown larger. And on it goes.

But it’s also partly down to the fact that even were the rate of technological change to surpass our appetite for more, allowing Western countries to produce more stuff with less carbon, we’d still have a problem. Global output would still keep rising as the bulk of humanity in developing countries expand their economies until they converged with ours.

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There’s no point telling them to stop, either. The globe’s carbon allowance is tight only because we in the West used most of it in the past few generations to get to the point where we can afford to talk about cutting back. Governments in poor countries, faced with the choice between saving life tomorrow and saving it today, will press the growth accelerator.

If we’re to prevent developing countries from exhausting the planet’s remaining carbon budget, we will need them to embark on the energy transition at the same time as us. That will require a massive wave of investment, which Western countries will largely have to fund. The result is that there will be a period that feels, at least to the more-privileged citizens of Western countries, like a recession.

So we’re back with degrowth.

There, say the economists, is the problem. As economic animals we want more, not less. In fact, they take this desire to be hard-wired into our being. There’s the dilemma: we can’t live (tomorrow) without degrowth, but we can’t live (today) with it.

But there may be a way out of this seeming trap. Being social animals, we align our behaviour with the incentive-structure of the society in which we live. It’s conceivable that “greedy” desires aren’t always innate, but may be encouraged by the environment in which we live. (After all, why else would the advertising and marketing industries exist?) The burgeoning field of behavioural economics is producing ever more research which suggests just that, that our decisions are framed and conditioned.

In fact, there’s a growing body of evidence which suggests our preferences are quite complicated – that people sometimes do opt for less over more. Take those recessions, for instance. Economic theory assumes that because they reduce overall utility, they are uniformly bad for us. But the evidence is more nuanced. While mental health suffers in a recession, physical health generally improves. However, the mental-health issues seem to result not from reduced consumption but from the sense of failure individuals feel in a society that moralizes earning power.

Is this a reason to embrace recessions? No. But it’s a reason to re-examine our assumptions. Building economic models that incorporate human complexity will be fiendishly difficult, but it may also lead to a more sustainable economy. That will arguably be the challenge of the next generation of scholars. The scientists are doing their bit to fight climate change. Now it’s time for the economists and social scientists to step up to the plate.